Paying Off Debt vs. Investing
Unless you’re fortunate enough to have no money issues of any kind, one question that may be on your mind (it should be), is whether your primary concern should be to repay debt or to invest any extra money that you have to work with. There are arguments for and against, so for most people it can be hard to determine which course of action will best benefit you at any point in time. If you have a sum of money, such as a tax refund, it’s best to consider the most effective way to use that money with your future in mind.
Deciding whether to pay off debt or invest is a scenario that you’re likely to face many times. The best decision for you will depend on your own unique financial situation.
Here are two paths to consider when making this decision:
1. Rate of return. This path involves looking solely at the numbers. What’s the most profitable use of your extra money? Since not all debt is created equally, the solution isn’t always clear. Student loans, mortgages, and similar debt may have low interest rates and you could profit more by investing rather than seeking to pay these off early.
* Credit card debt, on the other hand, costs you more. It typically comes with an exorbitant interest rate, making it wise to pay this debt off as soon as you can. The rate of return on paying off a debt like this would often be better than investing that money.
* Check your credit card interest rates, or interest rates on other lines of credit that may be costing you money before you decide what to do with your windfall.
* Saving for retirement is also essential, however, so consider the options available here as well. Does your employer contribute matching funds to what you put into your 401(k)? Consider investing at least the amount that your employer will match in order to double your money immediately.
2. How you feel. You should look at more than the numbers, considering your own feelings as well. Where do you think the money would be best used? If you have a significant windfall, do you feel best investing it or using it to repay a large portion of your mortgage? The best answer for you will fall in line with your highest priority goals.
* It’s important to make the decision that you’ll be happiest with, so consider all options before applying money to one or the other.
* You may want to speak with an investment professional or your family for advice. They may point out options you hadn’t considered.
Two Important Considerations
Before you begin to pare down your debt or invest, there are two important things you should consider:
* The first is to ensure that you have an emergency fund so you won’t have to rely on credit in the future if a financial emergency occurs.
* If your company has a 401(k), begin investing in it as soon as you can, even if you cannot invest a lot at first. At the very least, invest enough to receive matching funds from your employer.
Keep in mind that very rarely do you have to rush to a decision. Take your time and make choices that will benefit you both in the short term and for your future. Ultimately, it’s up to you to decide how you want to spend your money so follow these tips to help you make a decision you’ll be happy with.